A Controversial High Yield Stock

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few months ago I initiated a very modest position in Pitney Bowes (NYSE: PBI)

At that point in time, I decided to buy Pitney Bowes because I felt that Pitney Bowes was attractively valued, diversified, innovative, and very profitable. 

The market appeared to unfairly assume worst case scenarios for Pitney Bowes' dividend and business and these events were already more than priced into Pitney Bowes' stock price.  

By contrast, I felt that for at least the next 2 to 3 years that it was likely that Pitney Bowes would maintain its current dividend, unlikely that it would slash its dividend in half, and very unlikely that it would reduce it by more than half. 

Plus I felt that Pitney Bowes was diversifying its operations, reinventing itself and forming strategic alliances that will catalyze revenue and earnings growth down the road. 

Today I am reviewing this decision.  I want to determine three things: (1) What will happen to the dividend? (2) What does the future look like for Pitney Bowes? and (3) Should I buy more shares, hold onto my existing shares, or dump them?

The Company

First, Pitney Bowes is a leading provider of customer communication technologies.  A $5.3 billion company with 29,000 employees, Pitney Bowes serves both large corporations and small-to-medium-sized businesses in more than 100 countries. Pitney Bowes’ software, equipment, and services help businesses communicate more effectively in today’s multi-channel environment, so they can build long-term customer relationships and drive profitable growth.

Second, Pitney Bowes is more innovative than most people give it credit.  Pitney Bowes’ intellectual property portfolio includes more than 3,500 patents in areas such as ticketing, cellular phone payments, shipping, laser printing, encryption, and mail production.  Furthermore, the Intellectual Property Owners Association has consistently ranked Pitney Bowes in the top 200 companies receiving patents.

Third, Pitney Bowes has entered new markets, wisely acquired or partnered with growth companies, and diversified its operations.  From 2000 to 2007, for instance, Pitney Bowes invested approximately $2.5 billion in 83 acquisitions, most of which were in software and services.  More recently, Pitney Bowes announced a multiyear agreement with Facebook (NASDAQ: FB)

According to John O’Hara, president of Pitney Bowes Business Insight, Pitney Bowes will help Facebook build “the world’s largest point-of-interest database.” That agreement is reportedly the largest installation of geocoding in the world.  Pitney Bowes will offer global geocoding, reverse geocoding and other products for integration into Facebook’s applications and services – similar to what Pitney Bowes is doing with Google.   

The Dividend

A dividend yield of over 10% for a company that has a fairly large market cap is a red flag.  Many people will automatically either unfairly assume that something weird is going on within the company or that there is no way that the dividend is sustainable.  That said, let’s take a deeper look at Pitney Bowes’ dividend. 

According to MSN Money, Pitney Bowes’ earned $2.95 per share for the past 4 quarters.  A dividend of $1.50 gives us a payout ratio of roughly 50%.  That is a little higher than the 30 – 35% that I would like to see.  But if I were to use either Pitney Bowes’ most recent full year earnings or its average earnings over the past 3 years the payout ratio would be around 75 – 85%, which is very high, yet doable, for the year or so that it will take for Pitney Bowes to get earnings back on track.

A lot of analysts are concerned about Pitney Bowes’ declining cash flow that has fallen considerably over the past year.  But Pitney Bowes does appear to have enough capital to ensure that it will not have to downsize its operations anytime soon.  In addition, Pitney Bowes has a respectable return on invested capital and its fundamentals are healthy.      

According to the graph on Pitney Bowes’ website, Pitney Bowes has either maintained or raised its dividend every single year since 1982 when it was $0.10 to 2012 when it was $1.50. 

On one hand, based on Pitney Bowes’ website it is also clear that Pitney Bowes’ dividend yield is a strong selling point for the company.  That means that Pitney Bowes’ leadership may fear that a reduction in the dividend may cause income-seeking investors to dump the stock.

On the other hand, the street has praised companies that have cut their dividends such as Telefonica – a company that eliminated its dividend altogether – as long as they can adequately explain how they are creating shareholder value by doing so.   

So with a new CEO at the helm, it is going to be interesting to see what happens to Pitney Bowes’ dividend and how the street reacts.  Will he announce a growth plan and suspend the dividend?  Will he merely announce a restructuring plan?  Will he attempt to cut costs in order to protect margins and cash reserves and maintain the dividend?  Will he announce a turnaround?  Will Pitney Bowes take a few pages out of IBM's playbook?

The Decision

I decided to hold onto my shares of Pitney Bowes and closely monitor the company.  After all, like many other tech companies, there is a lot of uncertainty surrounding Pitney Bowes, which could be good or bad – we just don’t know yet.  I decided to give the new CEO some time before I make a decision because I feel that this company has the potential to be a lot more than just a "mail company."   

3 Factors to Consider

    1. The Leadership Team.  The management team is the most critical consideration.  Do you believe in Pitney Bowes’ new CEO, Marc Lautenbach, a former IBMer, and his team?  Are insiders purchasing shares?         
    2. The Dividend.  I still feel that it is likely that it will remain at $1.50, unlikely that it will get slashed in half, and very unlikely that it will get hacked.
    3. The Road Ahead.  What plans and new initiatives does Pitney Bowes’ new CEO announce?  What is his vision for the company?  How will Pitney Bowes leverage its relationships with Google and Facebook?                 

My Foolish Take

I suggest waiting to see what happens with this company over the next 3 – 6 months.  Unlike many other analysts, I do not believe that Pitney Bowes is going to whack its dividend (which would not necessarily be a bad thing).  After all, Pitney Bowes' business is stabilizing and next year the company should earn more than enough to cover its dividend.   

Furthermore, Pitney Bowes has the opportunity to grow alongside Facebook and Google in digital marketing and emerge as a leader in that rapidly growing space.  That market should eventually catalyze profitable growth for Pitney Bowes.  And growth in profits from social media and online marketing should more than offset declining profits from its mail business.   

Overall, there is a lot of uncertainty surrounding Pitney Bowes.  That means volatility.  Fortunately, because too many negative expectations are already built into Pitney Bowes' share price any moderately positive news should result in a nice pop.  That could happen if the dividend is assured, if the next quarter is positive, or if the new CEO articulates some sort of plan!  So you may also want to consider taking profits if and when the stock gets a nice pop.


RyanPeckyno is long Pitney Bowes. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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